236. The price of oil: 6 – Libya and the Last Oil Shock

‘Paradoxically, the very worst outcome [for oil prices] might not be a sudden shock, but a milder recession. If this were to create some temporary spare oil production capacity by depressing demand, … the urgency of the need to prepare for the impending peak could easily be forced off the policy agenda…

As the global peak approaches and the market tightens, any sudden interruption of oil production could [then] spark the last oil shock.’David Strahan (2007) — The Last Oil Shock (p. 177)

Two years on, economic uncertainty remains, and a return to growth is far from guaranteed. Yet across this time, the oil price has risen steadily. From a low of $40 in February 2009, Brent crude stands at well over $120 today.

The last time when the oil price was above $100, back in 2008, the economy was still booming. Three years later, during the long aftermath of the deepest global recession for eighty years, the oil price remains close to historic highs. How can this be possible?
Unrest in the Middle East has clearly offered the latest impetus behind the upward trend, providing the catalyst for the oil price to break through $100 in February and to surge further in the weeks since then.

In 2009, Libya pumped 1.79 million barrels of oil per day. The country is an important supplier of light, sweet crude to Europe, and is the world’s seventeenth oil producer.

In recent weeks, output in Libya has almost ceased. How the shut-in of less than 2% of the world’s oil production translates into a 20% rise in the oil price serves amply to underline the tightness of global petroleum supply.

There’s very little spare capacity to play with. When, and if, the geopolitical situation in the Middle East calms down, oil prices will likely correct, in part. Yet it’s clear that the overall trend is firmly upwards.

The impact of the global recession has merely been to divert attention away from the growing energy shortfall which will face us all in years to come.

Amidst the wild gyrations in energy prices of the past few years, steady trends have been hard to pick. This cyclicity is certain to continue, as investors react to economic news and to the direction of the market at any given moment.

The path of the oil price in recent times has been dominated by the historic summer 2008 peak and the dramatic slump which followed this. Plotting the oil price on a log scale serves to moderate the effects of dramatic shifts like these, placing more emphasis on the trend across a longer time scale.

The graph above serves to illustrate how from trough to trough, and from peak to peak, oil prices have doubled every five years since 1997. Extending these trends forwards could see oil prices reach $250 by 2015, and $500 by 2020.

2 responses to “236. The price of oil: 6 – Libya and the Last Oil Shock”

Last week I visited a petrol station to fill up the car. This was after an interval of a few weeks whilst the car was not used as much as usual.

Although I was vaguely aware of the increased fuel costs, I was surprised to find petrol at nearly 140 pence/litre and I was reminded of the contrast with earlier motoring days when petrol cost around 3/6 (3 shillings and 6 pence) a gallon. I could fill the tank in exchange for a crisp green one pound note.
In decimal money this is 17 or 17.5 pence a GALLON, or less than 4p a litre…

Some oil producing countries are subsidising the cost of petrol in their countries to below production costs and so their countrymen can still purchase fuel at not much more than these figures from our past. This would seem to be working against attempts to cut global consumption.

A couple of months ago I was reading an article in a discarded evening paper found on my train seat. The commentator was comparing the current fuel prices with those of ten years ago and why it was less likely that there would be any demonstrations about prices now compared with what was experienced in 2000.

They then went on to consider the situation in 1973 which was a previous occasion when prices rose sharply. However the commentary rather lost the plot as the topic throughout was based on the economic situation and completely forgot that the fuel price rises and shortages at that time had little to do with our economic state, fuel tax duty and company profits but rather more to do with an Arab-Israeli Middle East war which seriously affected the global supply of oil.

The sudden reduction in supply caused shortages and longer supply routes which had led to the rising prices at garages. The garages only served those known to be regular customers and limited customers to a few gallons at each filling. It was common for one’s local filling station to be without fuel for several days at a time. The situation caused the government to consider intervention and distributed stocks of little petrol ration books which they had had in store for some time.

Fortunately it was not necessary for rationing to be introduced as a means to limit demand and to ensure some access to petrol for everyone. Even so we still had to keep the ration books in case the situation deteriorated and for a couple of years had to hand the ration books over to the new owner whenever a car changed hands.

Thanks, Dewdrop — and it’s very good to hear from you. The parallels you draw between 1973 and now are intriguing, as in both cases increasing oil prices reflected tensions in the Middle East.

The events of 1973 offered a stark demonstration to the developed nations of just how much of the world’s energy resources were subject to political risk in the OPEC countries.

The responses to this wake-up call have been dramatic. Across the decades since, we have seen a sustained and largely successful effort to open up alternative oil and gas provinces in more politically stable, but often more environmentally challenging parts of the world.

These initiatives helped to reduce the dependence of the west on OPEC oil throughout the 1980s and 1990s, but as production in the North Sea, Alaska and onshore US has declined in recent years, the dominant position of OPEC in world energy markets has returned.

In recent years this has led to an increased urgency to control supplies from Iraq and to concern about Iran, as well as a sometimes uneasy accommodation with stable but not necessarily democratic countries around the Persian Gulf, across North Africa and in the former Soviet Union.

At the same time, the capacity of OPEC nations to continue meeting rising energy demand has increasingly come into question, and in western nations, the past decade has seen huge investments into unconventional resources such as oil sands in Western Canada and shale gas in the United States, whilst exploration has ventured into deepwater areas of the Gulf of Mexico and West Africa.

These twists and turns of the energy market provided the backdrop to some of the most momentous world events of the past forty years.

The effect of the crisis on Libya remains modest in terms of energy supply, but critically this is now superimposed on a very tight market. The global economic crisis of 2008-2009 weakened demand, temporarily, but as the world slowly emerges from recession, energy usage is rising dramatically once again, as yesterday’s 2010 global CO2 emissions data conclusively showed.

Thus although the spring 2011 oil price peaks of $125 fell back sharply to $110 in early May, this looked more like a correction rather than a retreat. Brent stands at over $116 today, and the trend is likely to remain firmly upwards across the years and decades ahead.